Was bitcoin ever designed for the kind of mass adoption we are seeing today?

In theory, it was. Anybody who has read the original bitcoin white paper will know that the crypto coin was designed for one very specific purpose; to be the currency of the internet.

The paper begins by calling out the problem with using fiat currency for digital commerce: “Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments.”

Why is this a problem? The paper states that “Completely non-reversible transactions are not really possible, since financial institutions cannot avoid mediating disputes.”

In other words, every time a payment is made over the internet, a financial institution must check it, but since they cannot be all-seeing and all knowing, despite their best efforts, it is generally accepted both that transaction fees must be added in order to compensate for the cost of the checks being made, and that a certain amount of fraud is unavoidable.

The paper goes on to suggest that bitcoin is the solution to this problem, because it is both decentralised and trustless. How so? It is trustless because the process of making a transaction is irreversible – eliminating fraud, and it is decentralised because the checks that must be carried out to ensure the process works are carried out by bitcoin miners, not financial institutions.

Mining bitcoin is like solving a mathematical equation. The first miner to solve the problem, receives the prize – in this case, a small amount of bitcoin.

We are not going to go into the technicalities of mining bitcoin or confirming transactions here; suffice to say that transactions create blocks on the “blockchain”, which are confirmed by miners, and so the chain increases in size, making it harder and harder, with each transaction made, to commit fraud. To do it, the fraudsters would have to have enough CPU power to take down and then rebuild the entire chain, and that is so unlikely as to be, to all intents and purposes, impossible.

Interestingly, the white paper does not make any mention of speculating on the price of bitcoin, and yet that it is what has ultimately made the currency such a hot topic. An idea good enough to make the use of fiat currencies on the internet obsolete, is worth investing in, right?

The problem arises when everybody realises that bitcoin is a potential game-changer at the same time. This is what is happening today, as more and more people, seeing their friends and colleagues making a small fortune playing around with digital currencies, want in.

All of a sudden, the game becomes a dangerous one. Bitcoin, and all of the other digital currencies just like bitcoin that have been created using the same underlying blockchain methodology, the so-called “alt currencies, is no longer being used for the purpose it was created – to make small online payments without incurring unreasonable transaction fees.

This is the reason why bitcoin is such a volatile currency – why the price goes up and down so much. It is not really bitcoin’s fault that it happens to be a good idea, it is not really the fault of opportunistic crypto entrepreneurs opening crypto exchanges and promising people huge rewards for speculating – it is not really the fault of the miners, who probably started out with good intentions.

But when a situation gets out of control, as has happened with bitcoin on many occasions in its brief history, governments, financiers, and, yes, even criminals, step in to try and take control of the situation. Regulation rears its ugly head; in South Korea, in China, in Russia- the debate “goes viral”, and suddenly the price freezes, and then falls.

What can be done about this, and who wins the battle for bitcoin’s soul, will probably dictate how successful the currency will be in the long term. Some will enjoy the ride, other’s will despair. But it seems, for now at least, bitcoin has been hoisted by its own petard. Nature abhors a vacuum, and a vacuum is, in a sense, what bitcoin has tried to create. The problem is, there are just too many interested observers, and too much riding on the outcome.

By attempting to remove the middleman, or third party overseer, from the online transaction, bitcoin has opened a financial pandora’s box.

Far from being a technical problem, the issues with bitcoin display all the same complexities that we usually associate with human nature. Not even Satoshi Nakamoto, whoever they may be, can fix that, and only time will tell if bitcoin exerts the same fascination in twelve month’s time, or if, by then, we have all begun to speculate about, and with, a different solution.

This content is sourced and brought to you by The Money Cloud – comparing the best rates for sending money overseas offered by hand-picked, regulated brokers and money transfer agencies.